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Learn about the basic strategies for controlling risks while trading Forex

The Forex market behaves differently from other markets. The speed, volatility, and enormous size of the Forex market are unlike anything else in the financial world. The Forex market is uncontrollable – no single event, individual, or factor rules it. Just like any other speculative business, increased risk entails chances for a higher profit or loss.

Currency markets are highly speculative and volatile in nature. Any currency can become very expensive or very cheap in relation to any or all other currencies in a matter of days, hours, or sometimes, in minutes. This unpredictable nature of the currencies is what attracts an investor to trade and invest in the currency market.

But ask yourself, How much am I ready to lose?” When you closed or exited your position, had you understood the risks and taken steps to avoid them? Let’s look at some foreign exchange risk management issues that may come up in your day-to-day foreign exchange transactions.

  • Unexpected corrections in currency exchange rates
  • Wild variations in foreign exchange rates
  • Volatile markets offering profit opportunities
  • Lost payments
  • Delayed confirmation of payments and receivables
  • Divergence between bank drafts received and the contract price

These are areas that every trader should cover both BEFORE and DURING a trade.

Exit the Forex market at profit targets

Limit orders*, also known as ‘profit-take’ orders, allow Forex traders to exit the Forex market at pre-determined profit targets. If you are short (sold) a currency pair, the system will only allow you to place a limit order below the current market price because this is the profit zone.

Similarly, if you are long (bought) the currency pair, the system will only allow you to place a limit order above the current market price. Limit orders help create a disciplined trading methodology and make it possible for traders to walk away from the computer without continuously monitoring the market.
*Please note that in this paragraph we refer to the traditional use of the